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Five questions with AXA Investment Managers
AXA Investment Managers (AXA IM) is an active asset manager with a focus on long-term results and responsible investing. With £758 billion of AUM across asset classes, AXA IM has adopted a partnership approach to developing solutions that help institutions achieve their financial goals sustainably. Its flagship ‘buy and maintain’ credit strategy, at the heart of its cashflow driven strategies for UK pension schemes, is designed to increase the predictability of client cashflows and is fully ESG-integrated. It is central to the delivery of the first Long Term Credit Fund (LTC) fund on the AMX platform, providing schemes with access to a high-quality, pooled cashflow solution. AXA IM has raised £1.1 billion for its multi-client Long Term Credit (LTC) fund, which was launched as a strategy on AMX in 2019. This brings the total asset under management for AXA IM’s Buy & Maintain team in London to £18.2 billion as at 31 Dec 2020. We asked Sebastien Proffit, Solutions Strategist at AXA Investment Management, about the use of a long-term credit fund and AXA IM’s experience of working with AMX. For Professional Investors Only
Long-Term Credit invests in fundamentally strong, long-dated credit to provide predictable cashflows for UK DB pension schemes. These cashflows have become increasingly important to pay pensions as the number of cashflow negative schemes, and the degree of cashflow negativity within schemes, continues to increase. LTC has been carefully designed with the aim to deliver a cashflow profile to meet member benefit payments by paying out both the coupons and principal received from the holdings. The high quality of credit provides both a strong resilience to risk and decent market liquidity – important characteristics for pension schemes as they start focussing on the end game of their journey plan. While LTC is used as a core holding in many self-sufficiency portfolios, the liquid nature of the fund and similarity to typical insurance portfolios also offers investors the flexibility to target other end games, such as a buy-out or a series of buy-ins. As a result, LTC ensures that a scheme’s first step towards their end game provides the greatest flexibility possible.
Liability Driven Investment (LDI) mandates aim to reduce a scheme’s funding level volatility. LTC complements this by meeting schemes’ cashflow requirements. In addition to generating cashflows, LTC also contributes to the interest rate exposure (defined as PV01) and provides an expected return in excess of gilts. LDI management requires a different skill set, with LDI experts focussing on buying government bonds and derivatives. LTC-type strategies (typically called Cashflow Driven Investment or CDI strategies) require detailed credit analysis and knowledge about the specifics of each issuer and bond to minimise credit risk. We work alongside a number of external LDI providers – both during the transition into LTC and on an ongoing basis. We provide timely and relevant interest rate exposure (i.e. PV01) or cashflow reporting for the LDI manager to help maintain an effective hedging solution.
Within LTC, we aim to hold each bond until maturity to avoid unnecessary trading costs that can cannibalise investors’ returns over the long term. It is therefore essential we consider the risks over the lifetime of each bond we buy. As a first step, we undertake in-depth fundamental analysis at the issuer and sector level. Those which have a weak fundamental profile or a high uncertainty of future cashflows are discarded to bolster longer-term risk mitigation. Fundamental analysis for us includes environmental, social and governance (ESG) risks, which can often materialise over a longer time period. As a result, these are considered by the credit analysts and portfolio managers as an integral part of the fundamental analysis and maturity selection of the bonds. The portfolio construction process also focuses on longer-term risk mitigation by capping the maturity of lower quality bonds or those in sectors which have a low predictability of future outcomes, such as retailers or automotives. Unlike in the LDI space, where accurate matching of key rate durations is required to minimise funding level volatility, we believe it is more efficient to implement a CDI strategy using a “full profile” fund, such as LTC. A full profile approach allows for a holistic overview of credit risk within the fund and a focus on maximising the quality of the cashflows to avoid unnecessary turnover, duplication of credit risk and to reduce forced buying within a particular maturity bucket to maintain guideline characteristics. We believe that the only way to achieve efficient and predictable cashflows is to have a single profile fund.
Implementing CDI needs to be considered as part of a wider journey plan, however it is traditionally funded as a form of de-risking. CDI is often funded either from equities or riskier bond strategies, such as multi-asset credit or global credit which are not cashflow focussed. In either case, if the primary motivation is for risk reduction and cashflow matching, then CDI can always be a useful tool, irrespective of market timing. We do know of some schemes that chose to invest smaller initial amounts into LTC and waited for spreads to widen, such as during the H1 2020 sell-off, or for their funding level to improve before locking in additional amounts of cashflow generation. While these and other similar methods to optimise market entry points continues to remain a discussion point, the overall decision to invest into the LTC was driven by the wider desire to de-risk and plan for their end game.
Our partnership with AMX has allowed us to focus on solving the investment challenges for our pension clients, while AMX delivers operational and reporting expertise. It has been a truly collaborative effort. One example has been to ensure that the LTC reporting contains all the metrics relevant to the fund’s investors and underlying members, including appropriate ESG metrics. We have also worked together to meet individual client circumstances. As an example, a client requested us to consider an in-specie transfer using a transition manager. While this would typically be operationally challenging and costly, the AMX team was able to work with our investment team to ensure a smooth transition into LTC.
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